Directors and Officers Liability Insurance

Directors and Officers Liability Insurance is often overlooked by companies, but whether you are a corporation, private company, or a non-profit organization, this coverage is extremely important.

 What is D&O Liability Insurance?

Most people understand the necessity of property and basic liability insurance, but in today’s very litigious society, everyone is at risk of being sued. As a board member of any organization, if the proper coverage isn’t in place, your personal assets could be in jeopardy in the event that you are named in a claim.

Everyone makes mistakes, and directors or officers of companies can often be held responsible or legally liable for any decisions, misstatements, errors, omissions, breach of duty, or any other wrongful act – whether alleged or actual – that may have been committed while they were in their position with a particular company or non-profit organization.

D&O insurance provides protection for individual directors or officers, as well as for the organization itself, against most expenses, judgements, or settlements resulting from lawsuits filed by shareholders, customers, clients, regulators, competitors, suppliers, and investigators.

Typically, there are three basic levels, or areas, of coverage:

SIDE A: This section directly insures the directors and officers of a company or organization and protects them from personal liability in lawsuits or claims of wrongful acts.

SIDE B: This level protects the company or organization against any losses that it indemnifies on behalf of the directors or officers. In other words, if the company pays any claims or settlements against its board members from it’s own pocket, the insurance company would reimburse these expenses.

So, basically, SIDE A protects the directors and officers while SIDE B protects the company.

SIDE C: This level of protection is also known as entity coverage and is designed to protect the company itself against securities lawsuits or other claims that may not be covered by their general liability policy. This is often needed if the corporation and the directors or officers are both named in a specific lawsuit.

Who Needs D&O Liability Insurance?

Every private company, public corporation, or non-profit organization that has a board of directors or advisory committee needs D&O Liability insurance. In fact, many investors will require that this insurance be in place before they give a company the agreed upon funding.

Before this type of insurance, companies and organizations would often have a difficult time getting people to accept positions on their boards or committees because of the personal liability risk involved. It is advised that any person considering a position as a director or officer in any capacity – profit or not-for-profit – should first make sure that D&O liability coverage is in place.

Who are the Directors and Officers?

Since companies are incorporated under state law, the exact definitions and responsibilities of directors and officers may vary. In some instances, the same individuals can serve as both directors and officers.

In a public company, the shareholders typically elect or appoint the board of directors, who then have the responsibility of overseeing the activities of the corporation. These directors will appoint the officers (president, vice president, CEO, CFO, secretary etc.) who are responsible for managing the day-to-day affairs of the company.

In a private company or non-profit organization that does not have shareholders, the board of directors is usually made up of individuals who are filling a position at the request of the owner or founder of the company. Their responsibilities would still include overseeing the well-being of the organization and appointing officers. In some cases, private companies will have a small number of shareholders even though those shares are not traded on the public market. In these instances, board members may still be elected or appointed by those who have financial interests in the company.

It should be noted that the directors and officers of many non-profit or charitable organizations often accept positions on a volunteer basis or receive a lesser salary than what they could earn at a for-profit company. For this reason, it is important to make sure that the proper insurance is in place as most people will not accept a volunteer position if there is a high level of personal risk.

Before D&O Liability insurance, companies and organizations would often have a difficult time getting people to accept positions on their boards or committees because of the personal liability risk involved. It is advised that any person considering a position as a director or officer in any capacity – profit or not-for-profit – should first make sure that D&O liability coverage is in place.

 What Does D&O Liability Insurance Cover?

Generally, D&O liability insurance will cover most compensatory damages and settlements as well as defence costs. In some cases, extensions can be added to include additional expenses such as investigation fees. In most cases, policies will not cover fraudulent, criminal, or intentional non-compliant acts, lost wages, fines, or taxes.

Who Does D&O Liability Insurance Cover?

Typical policies will provide coverage for any current, past, or future directors and officers, but you should verify that anyone who may have risk exposure is included. Sometimes coverage can extend to volunteers of non-profit organizations, non-board member executives, or other employees that may make important decision or investments that put them in a position for potential lawsuits.

Claims

D&O liability insurance usually operates on a “claims made” basis. This means that any claims made while the policy is in effect will be covered, regardless of when the wrongful act was actually committed. So, if a wrongful act occurred ten years ago but it wasn’t reported until this year, a company’s current insurance will cover the claim. This retroactive period means that directors and officers can be held liable for events that happened several years earlier, even if they are no longer with that particular company. As long as the insurance is in place at the time the lawsuit is filed, it will be considered a legitimate claim.

Most policies will have fixed level limits, but how those limits are determined can vary. Some will have a fixed amount per claim, while others may have a total annual limit. In this case, if your first two claims in any given year cause you to reach your annual limit, you will have no coverage remaining for any additional lawsuits that may be filed that year. Furthermore, other policies may incorporate both approaches, having a limit per claim as well as a total annual limit.

Whether a private company, a publicly traded corporation, or a non-profit organization, D&O liability insurance should be part of your risk management program. Without this protection in place, directors, officers, volunteers and other key executives could be personally liable for any alleged or actual wrongful acts that may be committed while they are occupying that position.

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